How to Claim Mortgage Interest as a Deduction on Rental Property?

If you own a rental property in the UK, understanding how to claim mortgage interest as a deduction on your rental accounts is essential to managing your tax efficiently. Many landlords ask, Can you deduct mortgage interest on a rental property UK?

Since April 2020, changes in tax rules mean you can no longer fully deduct mortgage interest against rental income. Instead, landlords now receive a 20% tax credit on mortgage interest payments, affecting how you calculate your taxable profits.

In this blog, we explain the current rules and answer common questions about can I claim tax relief on mortgage interest UK and navigating buy to let mortgage tax relief effectively.

What is Mortgage Interest Tax Deduction on Rental Properties?

Mortgage interest tax relief previously allowed landlords to deduct interest on their rental property mortgage from their rental income before any profit was taxed. This reduced their overall tax bill. However, since April 2020, the rules have dramatically changed for buy-to-let landlords.

You can no longer obtain a full deduction for mortgage interest paid. Landlords now receive a tax credit of 20% on mortgage interest payments, often referred to as the restricted mortgage interest tax relief system.

Can I Claim Tax Relief on Mortgage Interest UK?

If you ask, can I claim tax relief on mortgage interest UK, the answer will depend on your tax status. From the Finance Act 2015, Section 24 was implemented, rolled out to April 2020, for landlords:

• Pay tax on their rent income before they can deduct their mortgage interest cost.
• They are awarded a tax credit of 20% of their mortgage interest bills.

This impacts higher-rate payers disproportionately, as they are no longer getting relief at their marginal rates.

For example, if you are paying £6,000 annually in mortgage interest, you get a top tax credit of £1,200 (20% of £6,000) deducted from your total tax.

How Does This Impact Your Rental Property Accounts?

This affects your rental property accounts in the following ways:

• Record your gross rental income without excluding mortgage interest.
• Exclude other qualifying costs like maintenance, insurance, and agent fees for letting.
• After working out your tax bill on the net rental income, offset your mortgage interest payments with the 20% tax credit to adjust the overall tax bill.

Tax Relief on Mortgage Interest on Rented Property

• The relief on mortgage interest on rental property can only be 20%; therefore, higher-rate payers lose some of the old relief.
• The policy aims to put owner-occupiers and landlords on a level playing field.
• Where possible, some landlords have put property ownership in limited companies to write off the whole mortgage interest as a business expense and avoid these controls.

Steps to Claim Mortgage Interest Tax Relief

• Keep accurate accounts of mortgage interest payments.
• Report gross rental income on your tax return.
• Claim mortgage interest in a dedicated list to claim your 20% tax relief.
• Use professional accounting or tax advice to secure maximum relief and comply with tax legislation.

Conclusion

While an outright mortgage interest deduction is no longer available to the majority of individual property investors, understanding and properly claiming the current mortgage interest tax deduction in the form of a 20% credit is essential.

If you are asking, ’Can you claim mortgage interest on a buy-to-let property in the UK?’, call our dns accountant tax team today to get advice to minimise your tax bill and further information on mortgage interest tax relief. Contact us by calling 03330601807, or emailing us at [email protected].

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About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.